INSIGHT: Dow/Aramco Sadara venture focused on clear trends

LONDON (ICIS)--Dow Chemical and Saudi Aramco want to be earning $500m (€350m) each in 2016 from their finally agreed $20bn Sadara joint venture.

The companies have planned a greatly reconfigured and realigned project that is focused on emerging market growth but also on product lines hugely important to Saudi Arabia’s industrial development.

The critical feedstock options appear to have been addressed following the hiatus the project suffered following the 2008-2009 financial crisis – although perhaps not the relationship with the Aramco/Total (Satorp) Al-Jubail refinery.

The downstream product slate fits clearly with Dow’s modified portfolio, following the Rohm and Haas acquisition, and the technology goals of the Saudi partner.

Making all of this work was never going to be easy but the companies have produced an impressive plan and a timeline that sees the cracker and first polyethylene (PE) unit coming on stream in 2015.

Dow says the complex, which is designed to produce close to 3m tonnes/year of chemicals, will be ramped up to full production in 2016.

Dow has negotiated a deal that should satisfy investors. And with Sadara, Aramco takes another step towards adopting a leadership role in chemicals in Saudi Arabia.

“This enterprise will play a key role in the Kingdom’s industrial and economic diversification while contributing to the creation of thousands of high-quality jobs,” Aramco CEO Khalid Al-Falih said on Monday when the final investment decision on Sadara was officially announced.

“It will enable significant development in the country’s conversion industry, thereby supporting Saudi Arabia’s ambition to be a magnet for downstream manufacturing investments that add significant value to the Kingdom’s hydrocarbon resources.”

Dow CEO Andrew Liveris called the agreement the “right economic ownership model with the right partner”.

“It is designed to capture growth in the rapidly growing sectors of energy, transportation and infrastructure, and consumer products, by creating a manufacturing hub that will provide a differentiated product slate and an advantaged cost position,” he said.

The companies look on this as the world’s largest chemicals project – one of the largest integrated production complexes and the largest to be completed in one go – and not surprisingly have worked long and hard to get it right.

Back in 2006 Aramco was keen to add joint venture petrochemicals capability downstream from its refineries. The PetroRabigh project with Sumitomo Chemical was taking shape, and it was also talking to Dow about an even bigger mixed feed chemicals complex adjacent to the Ras Tanura refinery.

A new refinery and petrochemical complex at Ras Tanura was not to be, given the uncertainties that the global financial crisis and recession introduced into the thinking of both companies.

But emerging from the plans for this giant project – which envisaged a liquids and a gas cracker at its heart – the Al-Jubail complex outline appears more suited to the current ambitions of the partners. An initial public offering (IPO) of 35% equity in the venture is planned from 2013-2014 to mitigate some of the project risk.

This is not just a question of getting the feedstock slate, technology, product plan and engineering right. The partners have to be clear in what they expect from the deal.

For Dow, this was always a huge opportunity to lever its technology and expertise into the Middle East to tap into feedstock availability and (cost) advantage.

The companies are targeting average earnings before interest, tax, depreciation and amortisation (EBITDA) margins of more than 40%. The average equity earnings for each partner are said to be achievable over the first 10 years after start-up. Dow expects to reach cash flow break even within five years of start-up.

To capture growth for the building block chemicals (amines, glycol ethers, propylene glycol, polyether polyols and isocyanates), the plastics packaging materials and the products from the envisaged "value park", Dow will market products outside the Middle East while Sadara itself will be responsible for marketing in a local zone of eight countries.

Analysts have viewed the agreement positively and see it as emphasising some clear trends.

Moody’s, for instance, sees no reason to change its outlook on Dow’s debt rating, despite the draw on the company’s resources alongside its other planned commitments.

Credit Suisse sees the announcement as signalling confidence from Saudi Aramco in its ability to be able to deliver non-associated gas feedstock for the project and output from the Karan, Wasit and Shaybah fields. “This is positive for the entire sector’s long-term operating rates”, it says, and reduces the risk of raw material price inflation.

It notes that the project economics look good and that Aramco is embarking on the establishment of a new intellectual property platform that includes polyurethanes (PU), composite carbon fibre and photovoltaic encapsulent films.

“With guidance of EBITDA margins at c40%, we believe that the feedstock mix is likely to be of the order of 40% ethane and 60% of propane and other NGLs [natural gas liquids] by volume,” it suggests.

Sadara is a significant development by any measure and a project critical to the future development of the chemical industry in Saudi Arabia as it sees Aramco take a firmer grip on the Kingdom’s integrated hydrocarbons upgrading potential.